How Changes to the Secure Act 2.0 Could Affect You, Ep #182

The Secure Act 2.0 was recently passed bringing in hundreds of changes.

In today’s show, we focus on the most important changes that impact you. We’ll break down these changes to explore planning opportunities that could affect your retirement planning strategies.

Changes to RMDs bring tax planning opportunities

The 4000+ page Secure Act 2.0 will bring forth hundreds of changes in law, but we’ll focus on the biggest changes that may affect our audience.

Required minimum distributions (RMDs) are changing again. After being set at 70.5 for many years, the first Secure Act raised the age to 72, and now the age is changing again.

If you were born between 1951-1959, your required distribution age will now be 73.

If born in 1960 or beyond, you won’t have to take RMDs until age 75.

Many people are excited to hear that they won’t have to take their RMDs until later, but we see this as an opportunity for tax planning. We encourage you to take action. While not having to take the RMD might be welcome news since you can defer taking the required income for a bit longer, however, we’d like you to look at the big picture.

Think about how this might affect your lifetime tax burden. When tax planning, try to get a sense of how the actions you take in this current tax year will affect you not only now but in the years to come. Considering your lifetime tax burden could mean paying a bit more in taxes now so that you can pay fewer taxes over the course of your lifetime. You may want to consider doing Roth conversions while you are at a lower tax rate.

One of the stiffest tax penalties will now ease up a bit. Penalties for not taking the RMD will now be reduced from 50% to 25%. In addition, if you realize your error and correct it within a certain window of time, the penalty will drop to 10%.

More flexibility for the self-employed

For the self-employed, the SEP IRA had to be funded on a pretax basis. Now those who choose this retirement savings method can now use it like a Roth, choosing to pay taxes now and grow tax-free and have the funds grow tax-free.

This is one way that the government is using to bring in more revenue now.

Solo 401k contributions are now given a bit of flexibility. Rather than only being able to open and fund a Solo 401K by the end of the year, small business owners can open and fund this type of account up until their tax deadline–which adds some flexibility.

Changes to the 529 plan

Some parents are a bit hesitant to invest too much money in a 529 plan for their children due to the strict limitations imposed by this college savings plan. Now the limitations have expanded a bit. A new rule allows for up to $35,000 in overfunding to be rolled over to a Roth.

Of course, there are limitations to how this rollover can happen, so listen in to hear what they are.

Other changes

Beginning in 2024, the Roth 401K, 403B, and 457 will no longer be subject to RMDs.

Taking qualified charitable distributions (QCDs) retain the same starting age of 70.5, however, the maximum annual amount of $100,000 will now be indexed for inflation.

Employer contributions can now be treated as Roth contributions which could make them taxable income.

Starting in 2024, those 50 or over who earn $145,000 and above must make catch-up contributions as Roth.

Now that you are familiar with many of these changes, consider how they could open up tax and retirement planning opportunities.